Where Should I Put NEW IRA Money?

[ShokWaveRider]

Well, An old company of mine has just terminated their 401k plan as they were recently purchased. This leaves me with a $200k lump sum to invest some place.

Currently I am transferring it to the Vanguard Admiral Money Market Fund. It was generating 4% in a money market fund in my previous investment. This cash represents about 12% of our net retirement nest egg. The rest is all in CDs or fixed income securities. Neither my wife nor I work or get any form of pension yet. So I am pretty risk adverse at the moment.

I am looking for recommendations on where and how (DCA perhaps) to invest the lot. As always any assistance would be appreciated.

SWR

 

[unclemick]

Buy the Vanguard Target Retirement Series appropriate for your situation (Income) and forget about it. Unless you enjoy dinking around, bargin shopping for interest rates, etc.

 

[charlie]

Normally, I would recommend that you DCA a lump
sum into a fund containing equities. However, in
your case, since $200k is only 12% of your total nest egg that contains all fixed income, it seems safe enough
to plunge as unclemick suggested. You might consider
being a little more aggressive and use one of the Target
Retirement funds that contains a higher percentage of equity.

I understand your risk aversion, but in the long run
inflation is your enemy. IMHO, you need to decide on
an asset allocation strategy and start moving systematically to achieve it. Consider the $200k as a
down payment and DCA over the next 3 years to reach
your goal.

Check out Bernstein's "4 Pillars of Investing" and Swedroe's "Intelligent Investor" to gain insight into
what is important in the investment world.

Cheers,

Charlie

 

[johnblake]

I agree. Just because you need to live off of the investments does not mean that you should be in cash and fixed-income 100%.

Assuming 'fixed income' doesn't unclude equitues, I'd start DCA into the index500 over the next 2-3 years. Slow down when you reach 20-30% of your savings.

 

[Jarhead*]

Shockwaverider:

You didn't mention how old you and your spouse were
You also indicated that you don't qualify for a pension yet. (Apparantly you have one funded for the future.).

If your home is paid for, pension benefits to come later, and no desire to leave an inheritence, and if you're close to a pension, and soc. security, it is also reasonable that you could forgo equities altogether.
Assuming of course, your annual expenditures are not out of line with your net worth.
There is a point where the risk of equities isn't required, and its possible that's where you're at.
In any case, sounds like you are in a very enviable position.
Regards, Jarhead

 

[ShokWaveRider]

I am 50 and my wife is 46. We do not own a home at all as we are travelling for a few years.

SWR

 

[John Galt]

Not sure why but neither my wife nor myself cares
much about traveling, at least not world traveling.
I quit flying years ago which limits my travels
of course. I don't care as there is no where I want
to go that requires flying to get there. We like to stay home mostly. This helps to hold down the travel budget too.

John Galt

 

[charlie]

For most of us the desire to travel fades as we get
older. Do it now folks, before it is too late.

Cheers,

Charlie

 

[ShokWaveRider]

We live on a friends bigish boat in the Caribbean during the winter months and travel all around the islands for the whole time. In the Summer, so far we have spent time with the rellies in Canada. Who knows what will happen next year.

http://www.impconcepts.com/cruisingthecaribbean.htm

Just takin' it easy for a while, till interest rates edge up. ER is like a business to me. Lean off in the bad times and then get back to normal in the good. It is pretty lean right now. We have not had to start depleting our capital as of yet. Next year we may have to fork out for a house some place, or rent for a while. Whatever we buy will be a fraction of the cost of the home we sold last year in South Orange County California.

SWR

 

[johnblake]

That sounds like a fun ER. What do you do about hurricanes? Run from them?

In this uncertain economic climate, driversification is key. I've been 'waiting' for interest rates to spike for 3 years now.

 

[ShokWaveRider]

We only spend the winter in the Caribbean. No hurricanes.

SWR

 

[Cut-Throat]

In this uncertain economic climate, driversification is key. I've been 'waiting' for interest rates to spike for 3 years now.

I have no idea what's going to happen and so I invest appropriately.

 

[ESRBob]

Shock Wave -
Love the lifestyle (just got back from a week on my boat -- a whole winter sounds downright amazing!)-- but would only warn of the fallacy of 'only spending interest" on fixed income investments and thinking you are being really conservative or safe. Inflation is your enemy here, and unless you are setting aside your first 3% of annual return for inflation, you are spending capital. (OK, maybe 2.5% these days).

So, unless you have some pretty amazing money market accounts that none of us knows about, you are living on a half-a-percent of assets or so, or you are spending capital.

That is fine, but it isn't a long-term strategy.

That is why I've been forced to go out into the cold again, take on risk in equities, longer term or higher credit risk bonds, foreign,small, private equity, commodities, REITs etc etc.

There is just no safe, inflation-adjusted way to get a reasonable SWR.

Get thee to 4 Pillars!

Good luck,

ESRBob

 

[John Galt]

ESR Bob makes some good points, but I have had no money in equities since 1997 (before I
quit completely) and plan to never own one again.
Inflation is the great enemy and I will not return
to work. If it gets bad, further cutting back on spending
(still a lot of fat there) or our real estate will have to bail us out. So far, so good.....................

John Galt

 

[ShokWaveRider]

It looks like that the basic recommendation is to DCA into the Target requirement Series. More than likely the Retirement Income Fund or the Target 2015. I may also get some 5 year CDs that are generating 4.5% I am not sure the Vanguard REIT fund or the TIP fund would be a wise investment at this juncture.

Is there anyone who has been in the Target Retirement Income Fund for over 6 months? If so what have neen your real returns in your pocket, as opposed to what the Vanguatd statistics say.

SWR

 

[charlie]

Hey SWR,

I think you can believe the numbers Vanguard
publishes on their website.

Cheers,

Charlie

 

[ShokWaveRider]

Chuck:

I wish someone would explain them. If the Yield on a fund is say 4% and the total YTD Return is 1.13% What I am confused about is shouldn't the 6 months YTD = 50% of the yield at least, not less?

SWR

 

[Bob_Smith]

SWR, the total return takes everything into account - not just the yield. The market value of the securities in the fund go up and down. If the yield is 4%, and the market value of the securities in the fund declines, the total return can be zero or even negative.

 

[ShokWaveRider]

OK, so total return YTD is what it says, all things included. So if the Fund I choose Say the Retirement Income is estimated to return 4x1.19%=4.76 unless I can find a CD that is making over 4% I may as well invest in the Retirement income fund. Conversly if a fund is estimated to make under 3% I may as well put my money in a CD paying 3%+ and not risk my capital. Remember this is an IRA.

The target retirement funds have very little performance data, but the TIP fund looks reasonable, and as inflation is rising, it may also be a good choice.

SWR

 

[ESRBob]

SWR,
"past return is no guarantee of future results".
The dilemma with comparing these bond yields to a CD yield is that the CD's rate (at least for amounts up to 100k in a single bank) is guaranteed and principal is guaranteed.

On a bond fund ,however, asset value (bond price, price of the fund shares) can fall if interest rates rise, and vice versa. A bond or bond fund has two components to total return as Bob Smith pointed out in his last post, asset appreciation/depreciation and interest. The two can move together to add to a larger total return, or your asset values can fall and eat away all or some of the interest component of return.

Duration (or average maturity) is something else to look at. If a bond or bond fund has a longer avg maturity, then its prices will rise faster in falling interest rate environments (and vv) than a shorter maturity or duration fund.

Duration is handy for the math: if interest rates rise 1% and duration is 4, then price of the bond's underlying assets should fall 4% (4 x 1%). Put another way, duration can tell you roughly how many years you'd need to 'break even' with the higher yield outweighing your drop in asset values. Fund companies should give you the duration for your fund, but typically duration is about 2/3 of (or anyway something less than) average maturity.

I am wary of 'knowing' anything about the direction of interest rates; just because everybody assumes interest rates are going up, I still wouldn't bail on bonds, though I do keep my durations pretty short (2-3 years overall).

Complete safety of principal and expected return comes from CDs, though you have two risks there still: a) your real return will be nil or pitiably small. b) you will lock yourself into a low return for years relative to interest rates that have risen in the meantime, meaning you are forgoing interest-- opportunity cost-- vis-a-vis the case if you were free to move your money into those higher yielding investments.

No safe and sure lock on anything -- you pays your $ and you takes your chances...

Good luck with your decision,

ESRBob

 

[John Galt]

I'll bet I get feedback on this one.

In my IRA, I currently have 50% Freddie Mac notes
and 50% high yield bond fund. That's it. This is "forever" money and throws off about 6%
currently with very long maturities. I have had this allocation about a year now and the NAV is up maybe
3-4% reinvesting the interest. Now that interest rates
look like they might be heading up, I am thinking
about CDs again; 5-6 year maybe. Stocks are out.
BTW, I am 2 years from SS.

Thoughts?

John Galt

John Galt

 

[charlie]

John,

You might want to take a hard look at long term TIPS
bought on the secondary market for your IRA . I think
the "real" yield is around 2.3-2.4% now. Have you
noticed that after long term rates spiked up this spring,
they seem to be trending down now? Wab and Bob_Smith can comment on these issues better than I.

I have already moved 10% each into Vanguard's TIPS
fund and Intermediate Term Bond Index from the
40% previously allocated to Short Term Corporate in
my "coffeehouse" IRA. These moves were based on
my gut feeling that higher interest rates are already
"baked in" and moving farther out on "duration" (but
not too far) is probably OK. Time will tell.

Cheers,

Charlie

 

[ats5g]

John,

One thing that I've never quite understood about mortgage backed bonds is whether or not you get anything back when the bond matures (assuming the bond is not called before then). If Freddie Mac is passing through interest and principal (from the loan payer) to you, would an investor get anything back?

Have you thought about how much capital return you're going to lose due to the defaults of the HY bonds? I think that Vanguard's HY fund has lost around 1.5-2.2% annualized per year (depending on the time period) from defaults.

- Alec

 

[John Galt]

Hello Alec and Charlie. Yeah, I have thought also
that the interest rate increases may be "baked in"
somewhat. Who knows?

The Freddie Mac is notes. All I get is interest and they
are callable after 5 years. Otherwise, the interest rate
rises 1 point. My feeling at the time was they were
paying better than CDs and just as safe. I am not with
Vanguard on the HY bonds, but do not recall seeing
any red flag re. defaults when going over the
prospectus and other info. Of course, I only gave it a
quick look. I did see a comparison of hundreds of
bond funds in Kiplinger magazine? after I had bought the fund. I felt
pretty good as mine stacked up quite well
historically with other HY funds.

John Galt

 

[cute fuzzy bunny]

Wasnt it in 'the four pillars' where bernstein made a case against HY bonds unless the rate spread against treasuries was at least 5 percentage points?

Clearly nowhere near that now.

I do own some, with vanguard, but not much. Vanguards fund isnt as high yielding, but it does enjoy one of the lower default rates among high yield funds.